INCOME TAXES

The components of income (loss) before income taxes were as follows (in thousands):



	Year Ended December 31,
	2013		2012		2011
Domestic	$	4,691	$	37,095	$	(43,518	)
Foreign	26,424		26,612		26,720
Total	$	31,115	$	63,707	$	(16,798	)

The amounts above for 2011 exclude income (loss) from discontinued operations before income taxes of $3.1 million.

The income tax provision (benefit) consisted of the following (in thousands):



	Year Ended December 31,
	2013			2012			2011
Current:
Federal	$	(8,132	)	$	382		$	2,938
State	673			686			848
Foreign	2,099			757			518
Total current	(5,360		)	1,825			4,304
Deferred:
Federal	10,434			15,168			(15,516		)
State	5			1,337			(2,167		)
Foreign	(20		)	(1,001		)	(606		)
Total deferred	10,419			15,504			(18,289		)
Total income tax provision (benefit)	$	5,059		$	17,329		$	(13,985	)

The amounts above for 2011 exclude the income tax provision (benefit) from discontinued operations of $1.2 million.

The income tax provision (benefit) differed from a provision computed at the U.S. statutory tax rate as follows (in thousands):



	Year Ended December 31,
	2013			2012			2011
Tax at federal statutory rate	$	10,892		$	22,298		$	(5,879	)
State income taxes	644			692			(1,304		)
Differences in foreign tax rates	(8,232		)	(9,545		)	(7,759		)
Stock-based compensation	103			585			442
Research and development credits	(2,045		)	(136		)	(1,608		)
Nondeductible expenses	852			166			288
Accruals for intercompany payments	1,884			1,947			1,889
Change in tax rates	122			1,078			—
Non-deductible DOJ settlement	10,998			—			—
Settlement of IRS examination	(10,542		)	—			—
Other	383			244			(54		)
Total income tax provision (benefit)	$	5,059		$	17,329		$	(13,985	)

The Company's tax expense for the periods 2011 through 2013 was significantly reduced due to a tax holiday for its Costa Rican manufacturing operations. Under its original holiday agreement, the Company was not subject to Costa Rican income tax until January 2016. As of December 31, 2013, this agreement has been extended and will expire on December 31, 2023. The Company will have a 50 percent income tax exemption from January 1, 2024 until January 28, 2028. After January 28, 2028, the Company will be subject to the normal Costa Rican corporate income taxes, which are currently 30 percent. Without the Costa Rican tax holiday, the increase in income tax expense would have been $3.3 million for 2013, $3.4 million for 2012 and $3.0 million for 2011 representing a reduction to earnings (loss) per share in each year of $0.10, $0.10, and $0.11, respectively.

The Company recognized an income tax benefit from the federal research and development tax credit for the years ended December 31, 2013 and 2011. For the year ended December 31, 2012, the Company did not reflect an income tax benefit related to the tax credit as the credit expired on December 31, 2011. However, the tax credit was extended by the signing of the American Taxpayer Relief Act of 2012 ("ATRA") on January 2, 2013. Since the ATRA was enacted during 2013, the income tax benefit related to the federal 2012 research and development tax credit was recognized in the year ended December 31, 2013.



	December 31,
	2013		2012
Federal loss carryover	$	50,059	$	40,894
State loss carryover	7,362		33,116
Federal research and development credit carryover	8,261		7,999
State research and development credit carryover	12,561		12,346
Foreign loss carryover	251		1,391
U.S. Alternative Minimum Tax carryover	1,549		948

The Company's federal net operating loss carryforwards will expire between 2020 and 2032. The Company's federal research and development credit carryforwards will expire during the period 2021 through 2033. The Company's state loss carryforward will expire between 2018 and 2032. The Company's foreign net operating loss carryforwards, alternative minimum tax credits, and state research and development credits are not subject to expiration, with the exception of unused Texas state research and development credits totaling $0.5 million which will expire in 2033.

Under U.S. tax law, certain changes in the Company's ownership could result in an annual limitation on the amount of net operating loss carryforwards and income tax credits that could be utilized to offset future tax liabilities. At December 31, 2013, approximately $37.0 million of the Company's net operating loss carryforwards are subject to an annual utilization limit of approximately $6.5 million pursuant to IRC Section 382.

The Company's deferred tax assets and liabilities consist of the following (in thousands):



	December 31,
	2013			2012
Deferred tax assets:
Net operating loss carryovers, net of reserves	$	13,561		$	13,063
R&D and other tax credits, net of reserves	13,197			13,221
Allowances and reserves	6,546			5,911
Deferred revenue	2,261			4,522
Alternative Minimum Tax credit	1,549			948
Stock-based compensation	9,197			6,938
Other	278			861
Gross deferred tax assets	46,589			45,464
Valuation allowance	—			—
Subtotal	46,589			45,464
Deferred tax liabilities:
Property and equipment	(2,849		)	(2,232		)
Non-goodwill intangibles	(4,510		)	(323		)
Other	(1,269		)	—
Gross deferred tax liabilities	(8,628		)	(2,555		)
Net deferred tax assets	$	37,961		$	42,909

Income tax benefits resulting from employee stock compensation of $0.4 million , $0.0 million, and $0.1 million, were credited to additional paid-in capital for the years ended December 31, 2013, 2012 and 2011, respectively. The Company expects to record an additional $0.4 million credit to additional paid-in capital upon utilization of tax loss carryforwards generated in 2012.

Deferred U.S. income taxes and foreign withholding taxes are not provided on the undistributed cumulative earnings of foreign subsidiaries because those earnings are considered to be permanently reinvested in those operations. The permanently reinvested undistributed earnings were approximately $132.7 million, $105.7 million, and $73.3 million as of December 31, 2013, 2012, and 2011, respectively. For the same period, the tax impact resulting from a distribution of these earnings would be approximately $48.7 million, $38.7 million, and $27.0 million, respectively.

The Company's change in gross unrecognized tax benefits during 2013, 2012 and 2011 were as follows (in thousands):



	2013			2012		2011
Balance at January 1	$	20,449		$	18,601	$	16,478
Additions for tax positions of current period	2,355			1,848		2,232
Additions for tax positions of prior years	—			—		—
Decreases for tax positions of prior years	(14,924		)	—		(109		)
Balance at December 31	$	7,880		$	20,449	$	18,601

The gross balance of unrecognized tax benefits of $7.9 million excluded $0.9 million of offsetting state tax benefits. The Company recorded interest and penalties on the reserve for uncertain tax positions of $0.0 million, $0.2 million, and $0.2 million for the years ended December 31, 2013, 2012 and 2011, respectively. The Company's accounting policy is to include interest and penalties related to unrecognized tax benefits as a component of income tax expense. At December 31, 2013, 2012, and 2011, the amount of net unrecognized tax benefits that, if recognized, would affect the effective tax rate is $6.9 million, $19.3 million, and $17.4 million, respectively. At December 31, 2013 long-term liabilities included $1.9 million of net unrecognized tax benefits related to reserves and $5.0 million was recorded against the deferred tax asset for the net operating loss carryovers and credits.

In 2010, the Company was notified by the IRS of its intention to examine the 2006 federal income tax return related to certain transfer pricing tax positions. This examination was subsequently extended to include the 2007 - 2011 federal income tax returns. In the third quarter of 2013, the Company received a final settlement letter from the IRS which resulted in additional taxes payable of $2.4 million for the cumulative 2006 - 2011 tax years. As a result of this settlement, the Company reversed reserves for uncertain tax positions related to these years. The net effect of the final settlement was a net income tax benefit of $10.5 million for the year ended December 31, 2013.

The Company is subject to audit by the IRS and California Franchise Tax Board for the years 1994 through 2012 as a result of its net operating loss and credit carryover positions, and by the Texas State Comptroller for the years 2008 through 2012. As the Company has operations in most other U.S. states, other state tax authorities may conduct audits related to prior year activities; however, the years open to assessment vary with each state. The Company also files income tax returns for non-U.S. jurisdictions; the most significant of which are the UK, Sweden, Germany and Australia. The years open to adjustment for the UK and Germany are 2008 through 2012. The years open to adjustment for Sweden and Australia are 2009 through 2012.